The Other Side of the Superstar Effect

A couple of folks had interesting counterpoints to the superstar effect. Neil Strickland gave me permission to post the following email he sent:

I wonder if you’ve read, or if I’ve referred to, the Santa Fe Institute’s highly cited 2007 paper in PNAS (Proceedings of the National Academy of Sciences) called “Growth, Innovation, Scaling, and the pace of life in cities.” Its work was in “deriving growth equations which quantify the dramatic difference between growth fueled by innovation versus that driven by economies of scale. This difference suggests that, as population grows, major innovation cycles must be generated at a continually accelerating rate to sustain growth and avoid stagnation or collapse.”

For my MSc thesis in England last year I took that to mean that the agglomeration economies arms race favoring superstar cities is actually more of a doomsday clock. Right now a hardline national policy diverting some amount of economic heat out of the six big winners (Seattle, SFO, LAX, BOS, NYC, DC) might even be favored by middle and lower class victims of the housing market in those six regions — who, at the prevailing longtime low rate of wage growth, have much more to fear from property speculation than they have to lose in the margin of local job growth, for their future career prospects there should such policy take effect.

In the long run, meanwhile, the lower threshold of innovative critical mass will rise at a pace set by competitor regions like JJJ, Keihanshin, and the PRD, who boast an order of magnitude greater population and labor shed connection than the Northeast Corridor can offer. This means that even our winners (and not necessarily just the smaller ones like Boston or Seattle) will sooner or later not be able to “avoid stagnation or collapse” when global capital flows can find better productivity acceleration in Hangzhou or Shanghai. Better to build a rich ecosystem of more small baskets all across America rather than go for the global sweepstakes in ever fewer baskets, kill the feeder ecosystem, and virtually guarantee low resilience.

The interstate banking laws prior to the 1980s meant that with financial institutions making decisions locally, there were going to be some sources of capital interested in investing in Greensboro NC during economic troughs or retrenchments even when higher returns might be on offer elsewhere — which gave Greensboro a chance, at least, to recharge and start new cycles of local innovation. Whereas, if capital flows anymore chase the efficient boom areas at a given moment, that doesn’t actually result in the best total system outcome (not only for feeder cities like Indianapolis). Certainly not if a modicum of stability or trust continuity is something that matters where human families live. This kind of race away from patient cultivation toward high speed trading (in the broadest sense) would need to get wound down at the same time as policies to diminish labor market rent seeking by the superstar Six.

And in another post commenter David wrote:

I was born in Manhattan and still live a stone’s throw from NYC. There is a unique talent stack in NY, but I fear you bought into the myth that elite talent is propelling these change rather than being its beneficiary. Now Aaron that you are a New Yorker I suggest you find time to read Bonfire of the Vanities by Tom Wolfe.

This is a quote from the novel is from when NYC first caught fire in the early 1980s:

As Lopwitz put it, “The bond market has been going down ever since the Battle of Midway.” The Battle of Midway (Sherman had to look it up) was in the Second World War. The Pierce & Pierce bond department had consisted of only twenty souls, twenty rather dull souls known as the Bond Bores. The less promising members of the firm were steered into bonds, where they could do no harm. Sherman resisted the thought that it had been even thus when he entered the bond department. Well, there was no more talk about Bond Bores these days … Oh no! Not at all! The bond market had caught fire, and experienced salesmen such as himself were all at once much in demand. All of a sudden, in investment houses all over Wall Street, the erstwhile Bond Bores were making so much money they took to congregating after work in a bar on Hanover Square called Harry’s, to tell war stories . . . and assure one another this wasn’t dumb luck but, rather, a surge of collective talent. Bonds now represented four-fifths of Pierce & Pierce’s business, and the young hotshots, the Yalies, Harvards, and Stanfords, were desperate to get to the bond trading room of Pierce & Pierce.

What is happening in America is that Globalization is doing to America what it did to the smaller Western European Economies in the late 20th Century. In the case of America the best analogy is Great Britain. In the first part of the 20th Century the UK had an extremely well rounded economy. However, in my lifetime the only thing the world markets really wants from the UK are FIRE products from the City of London and North Sea Oil. Since these profitable goods dictate the exchange rate of the British pound, all other private sectors of the economy have essentially been malpriced and have withered.

Although the basket of goods is slightly different (including Aerospace and Technology) the same thing is happening here. Why did this happen in America so much later than in Europe? Because as late as 1980 85% of all commerce in the United States was domestic and thus exchange rates and cheap foreign labor did not really dictate the health of the US economy outside certain sectors. Now that American commerce has internationalized we are suffering the same fate as the UK.

Like in the quote above, New York is simply in a bunch of businesses that have continued to catch fire; and the collective talent has now convinced themselves they are in fact bunch of geniuses.

There’s definitely something to that. Just as Detroit boomed during the autos supercycle, the Bay Area is thriving with tech and will no doubt have to adjust when that inevitably ends at some point.

Nevertheless, it’s very clear the talent is higher caliber in NYC. I see it in the people I interact with. Beyond raw horsepower, the other side of the “talent” equation is access to the networks people have by virtue of their backgrounds and schooling at elite institutions. That may be unearned privilege in a sense, but it nevertheless exists.

The warning is definitely worth considering though. It’s not guaranteed that New York won’t go back serious decline at some point. As my wife likes to point out, New York will have to “save Central Park” yet again sometime in the future. But for now the superstar trend holds.

Theoretical limits to growth notwithstanding, there are arguments to be made that agglomeration economies scale better in older cities on the coasts (and perhaps Chicago) b/c transportation infrastructure (despite the complaints) exists and allows for greater geographic spread at higher densities. Phoenix may be able to sprawl as they annex parts umfamiliar, but TOD / “Transit Oriented Design” is a thing. Highway Oriented Design? That might be park-and-ride/kiss-and-ride. It’s not the same.Despite the stereotype of America’s love affair with the car, Amazon seems more likely to tap into existing desirable talent pools where people can, if need be, start their commute via mass transit and end it with a walk. That argues for gentrified coastal cities with expanded/expanding outer suburbs.

By comparison–and notwithstanding the ridiculous incentives–look at how Foxconn’s WI effort is not going particularly smoothly.

“Better to build a rich ecosystem of more small baskets all across America rather than go for the global sweepstakes in ever fewer baskets, kill the feeder ecosystem, and virtually guarantee low resilience.”

“This kind of race away from patient cultivation toward high speed trading (in the broadest sense) would need to get wound down at the same time as policies to diminish labor market rent seeking by the superstar Six.”

Yes, and yes.

The concentration of elite wealth and power in the “Superstar Cities” has already been a major contributor to “killing the feeder ecosystem” and reducing national “resilience.” See, e.g., the election of Donald J. Trump, arguably a reaction to this phenomenon. In the U.K., Brexit was a reaction to the concentration of wealth and economic power in London. While not exactly a zero-sum game, the rise of London has come at the same time as the stagnation and decline of the rest of the U.K.

Countries that have “more small baskets” are more resilient, all else being equal, than countries concentrating their economic power in a small handful or even a single political or financial capital. See, e.g., Germany, where no one metropolis dominates the national economy. And even though China is authoritarian, one could argue the citizens have less reason to revolt because the prosperity has spread more evenly in cities across the country instead of everything concentrating in, say, Beijing and Shanghai.

American’s network of “feeder” cities hasn’t disappeared, it’s just change. Cleveland, St. Louis, and Cincinnati have been replaced by Columbus, Portland, Nashville, Charlotte, and Austin. This change has left some better off and others worse off.

It was big regional and national banks lobbying for changes in the interstate banking laws (i.e. rent seeking) that led to (caused) further roll-ups and concentration when state and national laws and regulations previously prohibited it.

How are changes in banking laws “rent seeking”? They may have allowed it, but didn’t cause it. The globalization of finance is not exclusively and entirely an exercise in financial manipulation. It has actually allowed the creation of new economic value.

And it led directly to the Great Recession, “too big to fail”, and the Wells Fargo misbehavior. It has also pushed lower-end local small business lending out of banks and into the realm of “microfinance”.

About Aaron M. Renn

Aaron M. Renn is a Senior Fellow at the Manhattan Institute and an opinion-leading urban analyst, writer, and speaker on a mission to help America’s cities thrive and find sustainable success in the 21st century. (Photo Credit: Daniel Axler)